Will the Federal Reserve pause its rate hikes? Will economic data force them to raise rates again? We'll find out June 14 and on June 15, join us as Jeffrey Cleveland, chief economist at Payden & Rygel, analyzes the meeting, the Summary of Economic Projections, Chair Jerome Powell's press conference and offers his thoughts about what lies ahead for monetary policy.
Gary Siegel (
Hi, and welcome to another Bond Buyer Leaders event. I'm your host Bond Buyer Managing Editor Gary Siegel. Today we're going to discuss yesterday's Federal Open Market Committee meeting with my guest, Jeffrey Cleveland, chief economist at Payden & Rygel. Jeffrey, welcome and thank you for joining us.
Jeffrey Cleveland (
My pleasure, Gary. Great to see you and happy to be here.
Gary Siegel (
So was there anything in the post-meeting statement, the SEP or Powell's press conference that surprised you or grabbed your attention?
Jeffrey Cleveland (
Well, I don't know if surprise is the right word, but two things stood out to me. Number one, no dissent to the statement or the decision to pause or what I would prefer to call a skip if we've got to get technical. So everyone was on the same page with that message. I thought in the weeks leading up to the quiet period that there was a bit more of a mixed message out there. I heard from some Fed speakers who clearly were not happy with the lack of progress on inflation, which might hint at doing more sooner. But I think the core message from the leadership at the Fed was on the pause front. So I thought maybe there would be an opportunity for a dissent. I'm looking for a dissent, I like to mix things up, but we didn't see that. So that was one thing. And then the second thing is in the SEP, the median policymaker now sees inflation, so core PCE, their preferred measure of inflation, being 3.9% at the end of the year up from 3.5%. So that's a big increase and I think that is a acknowledgement that inflation is going to be stickier than many have hoped for, especially many bond investors had hoped for. So those were the two big things that jumped out to me in the immediate aftermath.
Gary Siegel (
Well, jumping on that point, if inflation is indeed going to be stickier, that's why the Fed said they might have to raise rates another 50 basis points this year, but they're also talking about cutting next year. How do those two work together that they are going to tighten this year and then have to loosen things next year?
Jeffrey Cleveland (
Yeah, a couple of things on that. So Chair Powell said yesterday, Hey, when you look, let's say a year out, don't put much weight on the projections. The further you go out, the more difficult it is. So I always counsel clients with that, keep that in mind. I think the second thing for me is with those SEPs, with the Summary of Economic Projections, they submit those before the meeting. So it's really everyone sitting around in their collective offices all across dispersed across the U.S. So someone in Kansas City and someone in San Francisco talking to their staff and putting together their projections. They submit those before the meeting and then what they put out for us is just the collective communication of that. It's not necessarily a policy document, here's what we plan to do or intend to do. It's just here's the collective thinking of the group at this moment in time.
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So I think that's important to take in. So I would focus on this year and the projections, and not to put too much emphasis on next year. And when I look at this year's projections, they raised their GDP forecast, the median policymakers, so they were at 0.4%, now it's up at 1% for the year. They cut their unemployment forecast down to 4.1% and they raised the inflation, the core PCE as I mentioned. And I think it's important to think about those and then think, okay, what does that imply for policy? And the median policy makers thinks that if that forecast plays out, it would be reasonable to have two more rate hikes. So they didn't hike in June, but maybe they hike next meeting, then they skip another meeting and they hike again because we have four meetings left in the year. So skipping would be two more hikes. So that's how my takeaway from those SEPs is to look at we're midyear, we have some data, we've seen the momentum in the economy and we have what they think the end of the year will be and we can grade them as the weeks and the months go by and see how we're tracking as things go.
Gary Siegel (
So Chair Powell said during his press conference that there's broad agreement that further tightening this year will be required. If you're going to have to tighten more, why pause now? Why not hike rates at this meeting and then maybe be done?
Jeffrey Cleveland (
Yeah, I think there was a question at the press conference on that. I have a gym membership and I want to lose a certain amount of weight by year end, so I should get going to the gym, right? Let's not wait until Thanksgiving nears and then start going to the gym. So I think there's something to be said there. I think also Chair Powell, I think at one point he framed it very well. He said, hey, the tightening process has three parts. One is when you're at zero and inflation is quite high, you know you have a lot of catching up to do, you can go quickly. So that was part one. So that was March of last year and they could go quickly. So they had their four 75 basis point meetings in a row. As things progressed though, you slow that down, so they downshift.
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And then I think the third part is they plan to keep interest rates restrictive for some time. So those are your three parts. We're still kind of in the, I would say the second phase of that. So I think that's something to keep in mind. It makes sense to slow down as you get higher in rates and we've had a 500 basis point increase. The other way to think about it is they don't know with any precision, I don't know either, where tight policy is where they're really going to be restrictive, but we're closer to it now, I think Gary, we can agree than we were in March of last year. So I think there is some prudence or there's some argument about being cautious as you get higher. And so I think that's where we are right now. So to me that's perfectly consistent.
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They went from hiking 75 basis points at a meeting, they downshifted to hiking at 50 and then 25 basis points. And now I think they're doing every other meeting 25 and we're just going to have to take it and see how things evolve to see what the next move is. So I think to me that makes sense for the process here. Yeah, sorry, the other analogy I like if you want, I travel for business and I was in London recently and if you travel a lot for business, you sometimes wake up in the middle of the night and you're like, where am I? And you want to switch the light on and I bolted out of bed not knowing where the light switch was and I hit my head. Yeah, you would say, Jeffrey, it would've been more prudent if you moved slowly, especially as you got closer to where you think the wall might be and yeah, that I should have done that but didn't. That's what they're trying to convey here early on, jump out of bed, quickly, go for the try to get closer to the light switch. That was last year's phase. Now we're much more like, hey, we know we're close to something. We've had some problems. Silicon Valley Bank for example. So we we're getting to some sense of tight policy. So let's just proceed a little more cautiously.
Gary Siegel (
Some analysts have suggested that a pause might have been appropriate a little bit earlier. The Fed has raised rates 500 basis points in about 15 months. Do you agree that maybe they should have stopped, given the lag in monetary policy working through the economy or was this the right time for the pause?
Jeffrey Cleveland (
Well, it's a tough job. I don't want to be in that position to make that call. We sent out a note in March and we said cause for a pause I think was the title of the note. And we were highlighting once you historically, once you see problems in the banking system, that generally coincides with end of the end of business cycles. And that generally tells you that monetary policy is tight. So I think you could have made a good case during March of this year that just skip a meeting or wait and we can see. So that was my bias. I've been wrong on that though, Gary. The data we've seen tightening and lending conditions, we have seen a couple of problems at the banks obviously, but job growth has held up, consumer spending has held up. We've yet to really see bank lending contract. So with the benefit of the last three months of data, I think they made the right call in terms of just going slowly rather than pausing. But I was in more of that thinking in the springtime.
Gary Siegel (
So what is your projection? What do you see the Fed doing raising in July and then skipping a meeting and raising again?
Jeffrey Cleveland (
That was my takeaway, skip. So they skip this one, they go next one, they skip the following, then they go one more. So we have four more, they hike at two. So we get to 5.50% to 5.75% on the fed funds rate range by the end of the year. And I would just point listeners, readers, viewers, back to my earlier comments. I think the way to think about it is to ask what does the Fed expect on growth? What do they expect on the unemployment rate? What do they expect on core PCE by year end? And then each month of data that comes out, we can track how things are evolving. And I think it's their forecast that they released yesterday. Their projections are pretty reasonable I think. So we just take 'em in turn like GDP, they expect 1% Q4 to Q4 growth by year end.
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We know the first half of the year is around 2% growth. So the way the math works out, if the economy just stalls from here, no growth Q3, Q4, we can still have a around 1% growth on a Q4 to Q4 basis at year end. So I think that's a reasonable outlook. I think the risk, Gary, is growth comes in a little bit better than that. We have modest GDP forecast for Q3 and Q4, so we're not expecting a downturn in the second half of the year. You can do a similar story, sorry, I don't know if you wanted to go into this, but if you can do a similar story on unemployment. The Fed expects the unemployment rate to be 4.1% by year end. Well ask yourself, we're at three seven right now. What would need to happen?
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Assuming nothing changes with the labor force to get 4% by year end, you need a big slowdown in jobs. So last month we had 311,000 jobs added. That is very strong job growth. So that tells me that if that continues, we're going to have a lower unemployment rate than the Fed is expecting. And then the third pillar is inflation. They expect 3.9% core PCE by year end. We are hanging out, I would say right now around 4.6% or 4 7%. So they're expecting, as Chair Powell said, a pretty good deceleration in inflation over the second half ofthe year getting down to 3.9%. It's possible it's a reasonable estimate. I think the way the math works out is you need month to month core PCE to slow below 0.3%. The problem is the average in the last year has been more like 0.4. So you need to slow down inflation.
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So I think that's the way to do it. When you think about what the Fed might do next, put down your estimates for GDP, put down your estimates for unemployment and inflation and see how it matches up to what they're expecting. Because like I said, I think their forecast is reasonable and with their forecast they have two more 25 basis point rate hikes. So if you disagree with that, then you got to have a different GDP view, higher unemployment view and a lower inflation view. That's how I'm thinking about what's going to, what's going to happen next year.
Gary Siegel (
So inflation has been sticky and the core really hasn't dropped much in the past six months, at least on a month to month basis. It's pretty much keeping the year over year number steady. Will the two rate hikes help this get it down?
Jeffrey Cleveland (
Yeah, I thought Chair Powell, not that I'm in the Chair Powell fan club here or anything,I don't want anyone to get confused, but I think he did a really good job on this because he was asked at the press conference about prospects for disinflation and various, and this happens to me in the day-to-day job where someone brings me one their favorite indicator, Gary, like ISM prices paid or I have my folks that are really into the M2 money supply, which is contracting and they say this little piece of evidence, this is it. We're in disinflation. And I think Chair Powell was saying, look, we've had a lot of forecasts for disinflation at the Fed but also private forecasters. And he said, we have made zero no progress. There's zero progress in the last six months. To your point, we really haven't seen that.
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So will we see progress in the coming six months? It's possible in our forecast. We do see some reason to think that inflation will deaccelerate a little bit more. Part of that is just that I think you can look at inflation and see some hopeful signs in various areas. So we think goods prices will continue to slow down. We think housing will feed through into rents and rents will ease. And we have seen a softening in the labor market which tends to feed through into services. So we can see services soften a bit. So I think the way the trends are right now, it's possible to have a bit of a bit more disinflation by the end of the year. The thing is the Fed also has that forecasted, like I said, they're, when you look at the numbers on the median participants forecast for core PCE to get to that 3.9% figure, it implies that the month to month core PCE will downshift from 0.4% readings down to point, just under 0.3%.
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So they're expecting that slowdown. The other part of your question, sorry, is two more hikes enough? I would just go back to what we kind of already, that path we already went down, which is nobody knows, I don't think a lot of folks are saying, hey, we should have seen a bigger slowdown in the economy, a bigger slowdown in inflation after what has been already implemented. And we really haven't seen that. And I mean there's probably three reasons for that. One lagged effects, maybe it will kick in with a lag. Two, the transmission mechanism from Fed policy to actual activity. Maybe it changed in some way. Maybe we don't really understand it. It could be pandemic-related. So there could be some misunderstanding there. And then the third is that they haven't done enough, Gary, they haven't done enough. I think that's the third one that a lot of bond investors really haven't taken in. They're saying, no, no, no enough has been done. Inflation's going to come down. This is it, they're done. They're done. It's possible they're not done. And to your question it's all three of those in some way.
Gary Siegel (
It's amazing how statistics can get you anywhere you want to go. Some people will look at certain indicators rather than others to prove that point. But if we look at the yield curve, it's been inverted for over a year or just about a year, which usually signals a recession coming, but recession has been predicted by some people for a while. Why does the economy continue to surprise forecasters and defy the doomsayers?
Jeffrey Cleveland (
This would be the most forecasted recession that I can remember. I've been hearing so much about that. But I do have great respect for the yield curve. I was accused actually our head of credit research said to me, you're the biggest promoter of the yield curve so you have to stick to it. Now you can't say that this time is different. And certainly if you look at, and I like to look at Gary, the three month tenure, that's my preferred yield curve. Cause I know there's all these permutations, some traders or they look at the twos fives or the fives thirties or the twos tens. But for me the three month, 10 year, that has a great track record historically. So I think we have to give it respect. I think a couple problems though, one is there can be lags.
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So from the time of inversion till the start of the recession, it can be lengthy in some instances. Most notably the 2006, 2007 era, we had almost two years or right around two years I believe of a lag between when we inverted and when we started. So the thing for investors to take in is timing matters. So in terms of the performance of the markets, especially if a recession doesn't begin until later. And I feel like we're in that right now where we had a lot of forecasts of recession, especially last fall and it just hasn't panned out. So lags matter could it could be, and I, I'm going to use those words this time could be a little different when you think about the yield curve. Just don't throw anything at me, Gary. And why is that though? Well, we do have some influences on the curve that might be unique to this cycle.
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One is the Fed itself. I mean the Fed was still buying mortgages and treasuries into 2022. So that weighs I think on the long end of the curve. So it could have kept the curve flatter than it otherwise would be. And that might have gotten us to inversion sooner. So that's something to keep in mind. Why has the economy been so resilient? I think Powell said it, he called it the extraordinary resilience of the U.S. economy, which continues to surprise. Well for me, for us we look at the consumer, how many people are employed, how many hours are they working, how much are they getting paid, taking those factors and we generate, if you want to call it, we call it a consumer consumer power measure or really it's just aggregate income, that is still growing 7% year on year in nominal terms, as of the latest jobs report that is 7% figure is important because in the last cycle it was growing around 5%. So we're still above in growth terms for that spending power where we were in the 2010s. So that's what I would say the consumer has more spending power than we realized, and that's keeping consumer spending going and obviously keeping growth going. So that's the key. So I would watch that chart carefully before you get too bearish Gary, on the economy
Gary Siegel (
And as we know, it's a consumer that propels GDP. So where do you stand on recession, Jeffrey? Do you see one coming? How long? When? Will it be moderate or severe?
Jeffrey Cleveland (
We have raised the probability in our outlook of a soft landing, and I think Powell said that yesterday there's a chance, there's still a chance that soft landing of course would be no recession. It would be the unemployment rate stays where it is a rises a little bit, but not a recession and inflation comes back down. So I still think that's a possible scenario here. Some people say to me, oh you're crazy. That's never happened before. It has in '94-'95. I would give you that as an example. Maybe 2015, 2016, you could think about that. We didn't have an official recession. A lot of people were forecasting recessions there. '98 even you could say. So there have been some instances where we had geopolitical stuff happen, we had financial meltdowns firms that failed and then we still had avoided a recession. So I think about that long enough time horizon, I think we will have a recession.
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You have to push that out. So I don't see one happening in the second half of '23. We have penciled in modest growth in GDP and Q3 and Q4. So I think we're going to avoid a recession this year. The further out you go, it's more difficult. Of course we'll have one at some point, but I think people overestimated the risk. I think at the start of year people said it was inevitable that we would have one this year. And we don't think that's the case at this point based on the data that we're seeing.
Gary Siegel (
So if you look at the SEP, the Fed is now suggesting if things go the way they expect that they will actually cut rates before inflation falls to falls to 2%. Do you agree that they would at some point cut rates if inflation is not at 2% yet? Or are they going to wait til inflation falls to 2%?
Jeffrey Cleveland (
I think it depends on the circumstances. If the unemployment rate is still low, then I don't think we'll see cuts. I think 2% for me is you could argue they they're not going to get all the way back to 2%. Maybe they get to two and a half percent, something like that. I think that's a possible way this plays out. But I think the key message that I would reiterate is that there has been a lot of expectation in the last year that at maybe first signs of financial instability or first hint of a downturn, the Fed was going to pivot, was going to give up on its inflation story to either bail out the stock market or to cushion the economy. And I think the message that we've been hearing in the last 15 months is that no, we're willing to have some financial tightening credit conditions tightening. We're willing to have subpar growth, higher unemployment to achieve 2% inflation, two and a half percent inflation if you want to there. That's the primary objective here. And I think that's been big for me. That's been the big disagreement that a lot of bond traders have with what the central bank is saying. A lot the bond traders saying no, the Fed will give up on that. They'll shift, but they haven't. So that's the main message that I would try to convey.
Gary Siegel (
Are the markets and the Fed now on the same page or at least closer than they were?
Jeffrey Cleveland (
I think they're closer, yes. I don't know that they're on the same page for what I just hinted at, but a few weeks ago, a couple of months ago, let's say the bond market was implying as four or 5, 25 basis point rate cuts by early next year. And to me that was pretty off sides with what the Fed was saying and the outlook that we had. So as we look at things today in the aftermath of the meeting, the cuts have been mostly priced out. So that's more in line. But I looked at it this morning, Gary, and you maybe have one hike, one additional hike from here priced in and then you have cuts next year. So I still think there's room for the bond market to be disappointed here. All due respect to my colleagues and my bond trader friends. I still think the message that the Fed was conveying yesterday is: no, inflation is sticky. It's been stickier than we thought. We might have more work to do and we might, even if we don't have many more hikes, we're probably going to keep rates higher for longer. I don't think that's been fully absorbed by the bond market or the financial market set at this stage the day after the 24 hour aftermath.
Gary Siegel (
Right. So what about the banking crisis, Jeffrey? Is that over? Is that not something we have to worry about or do we still need to worry about the banking crisis?
Jeffrey Cleveland (
I think we still have to be worried in the sense that I don't think enough time has elapsed so we can really say all clear. And what do I mean by that? Well, we saw credit of standards for lending tighten in Q4 and we saw an additional tightening in credit standards from loan officers in Q1. And we've just been tracking the weekly data on lending. It's been holding up, we're still seeing moderate single digit, high single digit year on year growth in bank loans so far this year. So I think it's too soon to say everything's all clear. I want to see, for me, I want to see a few more months, probably another couple months of the data to see that whether things have settled down. Because I'm really keen on, okay, is there going to be the knock on effect to aggregate lending and then that would maybe pass through into the employment and spending situation. So I think it's too early, I wouldn't declare victory yet. I wouldn't declare victory yet, but we're seeing good signs. I mean in terms of borrowing at the discount window, people tapping the Fed for liquidity, that seems to have stabilized and even come down. So maybe the most acute part of the crisis is beyond is behind us. Keep your fingers crossed, but I don't want to declare, I think it's too soon to declare victory here.
Gary Siegel (
So how would you rate the Fed's performance since the pandemic? You don't have to give them a grade or anything. Just what have they done right? What have they done wrong? What should they have done different maybe?
Jeffrey Cleveland (
Well, like I said, it's a tough job. I don't want it. I don't want to be too hard on them, but I suppose I would divide it. I would divide it into maybe two or three sets of semesters, if you will. If this is a course and we're giving them a grade, I'm happy to give grades here. I would, in terms of the initial phase, which is the crisis phase, so March and April of 2020, I would give an A-plus. Gary, you know, think about what is a central bank at its core, what is it supposed to do for 500 years of central banking history, providing liquidity in a panic so as to not let that panic spill over and cause more casualties than is necessary. And I think they acted very quickly and boldly in that period. So that's playing the lender of last resort role.
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And I think also the Fed has evolved in the last 15 years and has played a role of dealer of last resort lending to the bond market because the bond market in the U.S. is so critical to the economy and credit creation. So I think for that first phase, I'll give them an A-plus. The second phase would be more of the reaction to inflation and the movement away from very easy monetary policy. I don't know, maybe a C, C-minus there. I mean I do think they were slow to recognize, and I don't think I'm criticizing them because I think they would admit this, they were slow to recognize that inflation was going to be a bit more persistent and longer lasting. We hinted at this earlier, they were still buying bonds. So they're still doing QE in March of '22. So two years after the acute COVID crisis and after, I think at that stage you'll agree with me, Gary, we had a lot of evidence that the economy had bounced back, things had reopened and inflation had been pretty elevated for some time.
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So I think they were slow there. So I would give 'em a lower grade on that. And then yeah, the third semester too soon to tell it's I think a lot of investors are already quickly giving them a bad grade. They've done too much. They're going, I hear that, I hear they're going to break things. It's possible, but I don't think we know yet. So if you don't mind, we can follow up maybe down the road I'll give you my assessment, but I think we're still in the middle of that third phase of how they're doing with regard to is it going to be a soft landing? Is it going to be a harder landing? So TBD.
Gary Siegel (
Fair enough.
Jeffrey Cleveland (
Course incomplete. I don't know. I don't know what we put on the report card for that.
Gary Siegel (
Very good. So why has employment been so strong? Are employers afraid to let people go because they've had such a difficult time finding qualified employees in the past year, year and a half?
Jeffrey Cleveland (
Well, some of our clients, big Fortune 500 type clients type companies, and then at Payden we span the gamut, so we also have people that maybe it's a small business that started that's gotten bigger. So one of the good things about my job is they don't just stick me in a cubicle and have me turn out forecasts, I have to go out, talk to our traders and talk to all of our clients. And so that's good. And so I ask them, I turn the question on them, Gary, I say, Hey, what's going on here? And I do hear that a lot. There is this idea that you call it labor hoarding if you will, but there is an idea out there that hey, it might be difficult to get people back, so let's just keep the people that we have. So that might be part of it.
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I think though when you look at the last three years and you think about what's happened, this, the short version of the story that I would tell is that everyone thought we were going to face a post-2008 downturn. We had a lot of stimulus go in. We didn't have a post -2008 downturn. We did a huge amount of stimulus. So we reopened everything and we gave a lot of stimulus. So there was a huge demand surge. That demand surge it didn't just show up in prices as we all know. It showed up all in hiring because there companies were seeing a big demand surge and so they were running around trying to hire people. We saw this in the data actually, if you look at what you would call maybe poaching activity, people were moving from one job to another that got to a pretty high level and during the aftermath of the pandemic.
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And so I think that boosted hiring up higher than it would be, but this is probably temporary. What would be prudent I think for everyone to do is to expect a slow down. We're not going to keep adding, I don't think 311,000 jobs each month. It might be prudent and we have it in our forecast. We just have it slowing down to closer to 100,000 by sometime early next year. So I think a lot of the labor market trends that we've seen of late are due to that. Hopefully that short little story that I told you and some of those effects will fade as time goes on.
Gary Siegel (
So Jeffrey, you told us what you're asking your clients. What are your clients asking you? What are they most worried about?
Jeffrey Cleveland (
I would say number one is the inflation story. People are concerned, is it going to end up being more persistent or we're going to have a disinflation? So you have different clients with different views on this, but I would say that that's number one. And I think hopefully our message is in the near term inflation has been and will be stickier. Inflation is core inflation generally is slow to come down. We've seen that across business cycles but also across countries. So the same story could be told for Germany. And if you look at core CPI in Germany that I'm telling you for core CPI in the U.S., it's sticky right now and it'll be slow to come down. So that's the near term. Further out real, really important to note, we don't think we're going to have a 1970s style period where inflation is high.
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I'm sure you remember '72 to '82 core inflation was trending up throughout that period. We don't think that's what we're going to face here. So we do think price pressures will ease and inflation will come back down and we'll get back to that two and a half percent or even closer to that 2%. It's just going to take a bit more time for that to play out. So that inflation, that's probably the number one story because that's a global story. We have clients all over the world. I think let's say at the start of the year, a lot of European clients were pretty confident that it was just food and energy that were driving European inflation. But as you see, as the year has gone on, energy prices have come down, but core inflation in Europe is still the same, very similar story to the U.S.: still sticky.
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So that's probably number one. Question number two would probably be the recession that we talked about. Will we have one? When will it start? How deep would it be? I don't know if I answered how severe would it be? But I think thinking right now is that the hard, for me, a hard landing is the 2008 scenario and I don't think that's where we're at. The households are in better shape, corporations are in better shape. And for me, 2008 was a heart attack at the heart of the global financial system. And then that permeated out through all aspects of the economy. And I don't think we're going to repeat that here. There were some concerns about that with Silicon Valley Bank that would morph. But again, as we talked about I that we are now three months past that and we really haven't seen a post Lehman type environment. So hard landing is not our base case
Gary Siegel (
Other than inflation. What do you see as the biggest risks to the economy, Jeffrey?
Jeffrey Cleveland (
Well, I think the biggest risk that I would just continue to be worried about personally bank lending. Even if we don't have another bank failure, we know that we've got 4,000 banks and this country and a lot of the smaller banks are very vital to certain segments of credit intermediation. So whether that's commercial lending or whether that's consumer loans. So I still think we have to be a bit cautious. The Fed has hiked a lot, we've already seen some problems, evidence that loan officers are tightening lending standards. So watching that, what will be the knock on effect on actual lending? So I still think that's, like I said, we don't have enough evidence to say that it's fine. So I think that would for me is the big thing I'm kind of thinking about on a weekly basis. Other risks, I think if the it's risk, there's a risk that the Fed keeps going, are they going to be satisfied at year end with 3.9% core PC inflation?
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I hope I've argued, no, I don't think. If inflation remains sticky into next year, do they keep hiking beyond two rate hikes? Do they go further? And then what are the knock on effects of that? That's an interesting topic to bring up. What else? Globally? So I think the U.S. Chair Powell said, the U.S. economy is extraordinarily resilient. Are all economies on Earth as resilient? I don't think so. We're already seeing some cracks in Europe. We're already seeing some worrisome signs I think in China. So I think globally that watching that data probably concerns me more than watching some of the very resilient U.S. data. So banking, the Fed going more than people think and global data as being the top three concerns for me at this point.
Gary Siegel (
So what does all this mean for the bond market? All these things that we've discussed, inflation, the Fed, the economy,
Jeffrey Cleveland (
The two-year yield can go higher. I think that's a simple way to think about it. I feel I talk to friends or family, what do you do? Oh, I read and listen to central banks and look at the economic data. Why? Well I want to know about the path of overnight interest rates, like the current policy rate, but the path why it impacts the bond market. So it impacts primarily where two year yields, five year yields, 10 year yields go. So then people say, oh, that's not so exciting. Well, I think it is, but I think the immediate lesson is we might have more room for two year yields to go up, maybe back testing back to the 5% level where we got in the latter part of last year. Because if the Fed is potentially going to hike more and stay high for longer, then I think that has an impact on some of the shorter term bond yields.
(
So that's probably the most immediate one. Longer term rates might also have some room to edge up. Obviously five year yields and 10 year yields are more buffeted by longer term concerns and growth and inflation over a longer term. But they also price in when we look at the path of monetary policy. So there's some scope for that as well. So it's higher bond yields. What else? The better economy. If we're not on the cusp of a recession, the economy continues to grow in the second half. There might be some opportunities in places like the high yield bond market, for example. People maybe were too bearish thinking that a recession was about to begin and you need to lighten up on credit sectors in the bond market, but maybe the credit sectors in the bond market can do okay over the second half of the year. So I think that's a big implication of this. The dollar for me, Gary, is another big thing. If the Fed has more to do, the U.S. economy is holding up. Maybe the global economy's not as strong, that generally means the dollar's a bit stronger. So I think that could be an implication for client portfolios as well. So those are some of the big things that come to mind right off.
Gary Siegel (
Well, we're running out of time, so I want to thank you, Jeffrey for joining us. I want to thank our audience for listening to us and everyone have a good afternoon.
Jeffrey Cleveland (
Gary. Have a great week and a great summer.
